Looking “Under the Hood” for Other Items
Most of the other working capital accounts are straightforward, especially the current liabilities side of the balance sheet. But you do want to be on the alert for the following:
• Off-balance sheet financing.
• Derivatives.
Notice that Delta’s receivables more than doubled from 2002 to 2003. Is this a dangerous sign of collections problems? Let’s take a look at the footnote:
We were party to an agreement, as amended, under which we sold a defined pool of our accounts receivable, on a revolving basis, through a special-purpose, wholly owned subsidiary, which then sold an undivided interest in the receivables to a third party…. This agreement terminated on its scheduled expiration date of March 31, 2003. As a result, on April 2, 2003, we paid $250 million, which represented the total amount owed to the third party by the subsidiary, and subsequently collected the related receivables. (Note 8, Delta 10K FY 2003)
Here’s the translation: during 2002, most of Delta’s receivables were factored in an off-balance sheet transaction. By factored, we mean Delta sold some of its accounts receivables to another company (via a subsidiary) in exchange for cash. In brief, Delta gets paid quickly rather than having to wait for customers to pay. However, the seller (Delta in this case) typically retains some or all of the credit risk–the risk that customers will not pay. For example, they may collateralize the receivables.
We see that during 2003, the factored receivables were put back onto the balance sheet. In economic terms, they never really left but sort of disappeared in 2002. So, the 2003 number is generally okay, but there was not a dramatic jump. More importantly, if we were to analyze year 2002, we’d have to be sure to manually “add-back” the off-balance sheet receivables, which would otherwise look artificially favorable for that year.
Taken From : Advanced Financial Statements Analysis